Experience-Based Heterogeneity in Expectations and Monetary Policy

43 Pages Posted: 13 May 2021 Last revised: 15 Nov 2022

Date Written: May 12, 2021

Abstract

We incorporate expectations heterogeneity across age groups into a New Keynesian model with overlapping generations by assuming that agents only use lifetime observations to forecast inflation and the output gap. Relative to a model version with homogenous expectations, the transmission of monetary policy on inflation is impaired and its stabilisation trade-off under supply shocks aggravates. Since aggregate expectations are a function of the age-distribution, a demographic variation affects the monetary policy transmission on inflation through a composition effect on aggregate expectations. An increase in the share of old individuals enhances the monetary policy transmission on inflation and attenuates its stabilisation trade-off via the composition effect.

Keywords: Monetary Policy, Learning, Heterogeneous Expectations, Experience Effects, Demography

JEL Classification: D84, E31, E52, E70

Suggested Citation

Radke-Arden, Lucas and Wicknig, Florian, Experience-Based Heterogeneity in Expectations and Monetary Policy (May 12, 2021). Available at SSRN: https://ssrn.com/abstract=3844558 or http://dx.doi.org/10.2139/ssrn.3844558

Lucas Radke-Arden

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

HOME PAGE: http://https://sites.google.com/view/lucasradke/home

Florian Wicknig (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Strasse 14
60431 Frankfurt am Main
Germany

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